“We urge Heads of State, country policymaking entities and organizations managing economies, to actively seek people with good knowledge of macroeconomic management.”
In our 20 years conducting business and visits within more than 75 countries we have affirmed our belief in the theory that the best macroeconomic management policies are counter cyclical rather than procyclical. Counter-cyclical macroeconomic policies aim to mitigate economic fluctuations by adjusting government spending and taxation opposite to the prevailing economic cycle.
This approach helps stabilize the economy during downturns and prevent overheating during upswings. On the other hand, procyclical policies neglect broader economic trends. Procyclical policies exacerbate economic cycles by amplifying the impact of prevailing economic trends. 
For instance, increasing government spending during an economic boom or tightening fiscal policy during a downturn are procyclical actions. While these policies may seem intuitive, they can intensify fluctuations rather than stabilize the economy.
Counter-cyclical measures, in contrast, work against the prevailing trend to dampen the impact of economic cycles and promote stability. Unlike their procyclical counterparts, which amplify economic fluctuations by acting in concert with the prevailing cycle, countercyclical policies operate as stabilizing forces. Counter-cyclical measures provide a more comprehensive and adaptable framework for managing macroeconomic stability on a national level. Imagine the Phillips Curve, depicting the trade-off between inflation and unemployment. Procyclical policy, akin to pushing against the curve during booms and exacerbating inflation, destabilizes the system. Conversely, countercyclical policy, analogous to pulling back during booms and pushing during recessions, aims to smooth the curve and promote stability.
That is precisely why we have, since 2016, actively integrated prescriptions for sound macroeconomic management policies in every country and sector that we work and began to encourage advanced and developing countries to focus on boosting production as a way of managing debt and operationalize countercyclical policy management.
This requires individuals with high levels of macroeconomic know-how, (Macroeconomics significantly differs from microeconomics in scale, variables, technology, qualifications required of personnel and methodology).
Effective implementation demands not just sound theoretical understanding but also specialized expertise. Unlike its microeconomic cousin, macroeconomics operates at a vastly different scale, encompassing complex interconnected variables and requiring sophisticated econometric modeling techniques. Just as navigating treacherous seas necessitates a skilled captain, managing an economy demands individuals with a robust grasp of macroeconomic dynamics.
Examples of Successful Implementation of Countercyclical Policies:
Empirical evidence underscores the efficacy of the countercyclical approach. Consider the aftermath of the 2008 Global Financial Crisis. Countries like South Korea, which implemented timely fiscal stimulus packages, experienced shallower recessions compared to those adopting procyclical austerity measures. Similarly, China’s targeted infrastructure spending program mitigated the global crisis’s impact, demonstrating the power of countercyclical intervention. These examples are further discussed below:
1. South Korea (2008 Global Financial Crisis): During the 2008 crisis, South Korea implemented a fiscal stimulus package worth nearly 13% of GDP. This included increased infrastructure spending, tax cuts, and unemployment benefits. As a result, South Korea experienced a shallower recession compared to many other developed countries, with its GDP contracting by only 0.4% in 2009.
2. China (2008 Global Financial Crisis): China embarked on a massive infrastructure spending program worth trillions of dollars, focusing on areas like transportation, energy, and housing. This program bolstered domestic demand and helped mitigate the impact of the global crisis on China’s economy. China’s GDP grew by 9.4% in 2009, a stark contrast to the global recession.
3. United States (American Recovery and Reinvestment Act of 2009): In response to the Great Recession, the US passed the American Recovery and Reinvestment Act (ARRA), a $787 billion stimulus package. This included infrastructure spending, tax cuts, and unemployment benefits. While the effectiveness of the ARRA is debated, it is considered a prime example of countercyclical policy in action.
4. Chile (Copper Price Fluctuations): Chile’s economy is heavily reliant on copper exports. To manage the boom-and-bust cycles of copper prices, Chile uses a fiscal rule that sets spending limits based on expected copper revenues. This prevents excessive spending during good times and allows for increased spending during downturns, stabilizing the economy.
5. Singapore (Automatic Stabilizers): Singapore utilizes a series of automatic stabilizers, such as progressive taxation and unemployment benefits, that automatically adjust based on economic conditions. This helps to automatically mitigate the impact of economic fluctuations without requiring discretionary action from policymakers.
Useful Models and Tools:
The Mundell-Fleming model, a cornerstone of open-economy macroeconomics, highlights the importance of policy adjustments in response to external shocks. By adjusting fiscal and monetary policy stances countercyclically to external imbalances, nations can mitigate adverse spillover effects and promote macroeconomic stability.
Beyond these specific examples, countercyclical policy represents a comprehensive and adaptable framework. It acknowledges the dynamic nature of economies, avoiding the rigidity of fixed rules often associated with procyclical approaches. This adaptability is crucial in the face of ever-evolving economic and technological landscapes.
Therefore, we urge policymakers, economic stewards, and leaders across the globe to prioritize recruiting individuals with demonstrably strong macroeconomic expertise. Economic success is not merely about weathering the storm; it’s about proactively steering your vessel towards calmer waters. Choose countercyclical policies, invest in the right crew, and embark on a course towards a more prosperous future.
Further Considerations:
- Policymakers should explore the concept of the output gap, which measures the difference between actual and potential GDP, and its role in guiding countercyclical policy decisions.
- Technical Assistants should analyze the IS-LM model, a foundational tool in understanding how fiscal and monetary policy interact to influence aggregate demand and economic activity.
- Investigate the ongoing debate surrounding the appropriate fiscal multipliers, which estimate the impact of government spending on GDP, in different economic contexts.
These theoretical and empirical tools can help countries enhance prosperity and stability.